escrow mechanism<\/a>.<\/p>\nIOLTA is where the “trust account” gets its common name. It stands for Interest on Lawyers’ Trust Accounts. When client money is small in amount or held for only a short time, it is not practical to open a separate interest account for each client, so the funds are pooled in one IOLTA account. The interest that pool earns does not go to the lawyer or the client. It is sent to the state’s IOLTA program, which uses it to fund legal aid for people who cannot afford a lawyer.<\/p>\n
Larger sums, or money held for a long time, are handled differently. Sometimes a client’s funds are large enough, or held long enough, to earn real interest for that client. Then the lawyer opens a separate interest-bearing account in the client’s name, and that interest belongs to the client. The bookkeeper does not decide which account applies. The lawyer does. The bookkeeper records it correctly and flags anything that looks misplaced.<\/p>\n
What are the rules for a client trust account?<\/h2>\n
The rules for a client trust account start with ABA Model Rule 1.15, titled Safekeeping Property. The Model Rule is not law by itself. It is a template that almost every state bar has adopted, usually with its own additions. When a state rule and the Model Rule differ, the state rule wins, so always check the bar rules of the state where the attorney is licensed.<\/p>\n
Rule 1.15(a) sets the base duty. A lawyer must hold client property separate from the lawyer’s own property, keep the funds in a separate account, and preserve complete records for a set period after the representation ends. The Model Rule sets that period at five years. Several states require longer, so treat five years as a floor, not a ceiling.<\/p>\n
Two more parts of the rule shape daily bookkeeping. Rule 1.15(b) says a lawyer may put a small amount of the firm’s own money into the trust account, but only to cover bank service charges, and only in the amount needed for that. Rule 1.15(c) says fees and expenses paid in advance go into the trust account and come out only as the lawyer earns the fee or incurs the expense. That single sentence is why an unearned retainer is a liability, not revenue.<\/p>\n
The rule also governs money movement and disputes. Rule 1.15(d) requires the lawyer to notify a client promptly when funds arrive, deliver what the client is owed, and give a full accounting on request. Rule 1.15(e) says that when two parties both claim an interest in money the lawyer holds, the disputed portion stays in trust until the dispute is settled. For the bookkeeper, that means some client ledger balances cannot be touched even when a payout looks due.<\/p>\n
State bars add teeth to these rules. Many now require documented reconciliation on a fixed schedule. Illinois, under revised Rule 1.15A effective 1 July 2023, requires lawyers to perform a three-way reconciliation at least quarterly, and most firms do it monthly as standard practice. Knowing the specific state’s schedule is part of the job.<\/p>\n
How does three-way reconciliation work?<\/h2>\n
Three-way reconciliation is the check that proves a trust account is intact, and it is the single most important task in law firm trust accounting. It compares three numbers that must all be equal on the same date: the bank statement balance, the trust balance on the firm’s books, and the total of every individual client ledger. If all three match, the account is clean. If any one differs, there is an error or a shortfall to find before month-end closes.<\/p>\n
The three legs are simple to name. The first is the adjusted bank balance: the trust account balance from the bank statement, adjusted for deposits in transit and outstanding cheques. The second is the book balance: what the firm’s general ledger says is in trust. The third is the client ledger total: add up what every single client is owed, one matter at a time, and you should land on the same figure.<\/p>\n
Here is a worked example for a small firm’s IOLTA account at month-end.<\/p>\n